Section 39(2) of the Constitution requires that the spirit, purport and objects of the Bill of Rights must be promoted when interpreting legislation, and when developing the common law or customary law. In the matter of Mohamed’s Leisure Holdings (Pty) Ltd v Southern Sun Hotel Interests (Pty) Ltd 2018 (2) SA 314 (SCA) (Mohamed’s v Southern Sun), the Supreme Court of Appeal recently considered whether the common law principle of pacta servanda sunt should be developed by importing the principles of ubuntu and fairness into the law of contract. Pacta servanda sunt is an established principle of our common law which, in lay terms, means that agreements must be honoured by the parties. The fact that parties freely and voluntarily enter into agreements gives effect to their Constitutional right of freedom to contract and this is one of the reasons why our courts have, time and time again, upheld the principle. A failure by our courts to do so may lead to an imposition of the court’s own sense of fairness and, as a result, the creation of a contract that was not initially agreed to or intended by the parties. In Mozart Ice Cream Franchises (Pty) Ltd v Davidoff and Another 2009 (3) SA 78 (C) Davis J held that “… without this principle, the law of contract would be subject to gross uncertainty, judicial whim and an absence of integrity between the contracting parties”. In the matter of Mohamed’s v Southern Sun before the Supreme Court of Appeal, a lease agreement had been entered into between Mohamed’s and Southern Sun in terms of which Southern Sun leased property for purposes of operating commercially as a hotel. Payment of the monthly rental was due to Mohamed’s on the 7th day of every month and Southern Sun arranged a debit order with its bank, Nedbank, in order for the rental to be automatically paid over to Mohamed’s.

On 7 June 2014 the rental, unbeknownst to Southern Sun, was not paid to Mohamed’s and accordingly, Mohamed’s sent a letter to Southern Sun in which it afforded it an opportunity to remedy the breach within five days of receipt of the letter. Furthermore, Southern Sun was cautioned that should it fail to make payment in the future, Mohamed’s would cancel the agreement without giving Southern Sun notice to remedy the breach and it would be required to vacate the premises with immediate effect. This was in accordance with clause 20 of the lease agreement.

The reason for the non-payment of the rental was due to a system error on Nedbank’s part, which Nedbank confirmed in writing to Mohamed’s. Southern Sun arranged for payment of the rental with interest and the lease agreement continued as normal until October 2014 when payment of the rental was again not made. This time Southern Sun had checked that the debit order went off its account on the 7th but was not made aware of the fact that Nedbank had erroneously paid the rental into the incorrect bank account and, therefore, the funds had not been received by Mohamed’s. On 20 October 2014 Mohamed’s attorneys invoked the provisions of clause 20 of the lease agreement and sent a notice of cancellation to Southern Sun instructing them to vacate the premises by 31 October 2014. Mohamed’s stood by its decision to cancel the lease notwithstanding the fact that payment with interest was made by Southern Sun on 21 October 2014 accompanied by a letter from Nedbank addressed to Mohamed’s confirming that it was responsible for the incorrect payment having been made.

The essence of the argument advanced by Southern Sun was that the implementation of the cancellation clause was, under the circumstances, objectively unreasonable, unfair and against public policy. It was advanced that public policy is informed by “…the concept of good faith, ubuntu, fairness and simple justice between individuals” and that the common law principle of Pacta servanda sunt should not be treated as “a sacred cow” but rather developed to uphold the ubuntu values of the South African people.

The interaction between public policy and pacta servanda sunt is not foreign to our courts: the Supreme Court of Appeal held in Wells v South African Alumenite Company 1927 AD 69 that If there is one thing which, more than another, public policy requires, it is that men of full age in competent understanding shall have the utmost liberty of contracting, and that their contracts, when entered into freely and voluntarily, shall be held sacred and enforced by the courts of justice.”

In Sasfin (Pty) Ltd v Beukes 1989 (1) SA 1 (A) ([1988] ZACA 94) the judge stated that “The power to declare contracts contrary to public policy should, however, be exercised sparingly and only in the clearest of cases, lest uncertainty as to the validity of contracts result from an arbitrary and indis- criminate use of power. One must be careful not to conclude that a contract is contrary to public policy merely because its terms (or some of them) offend one’s individual sense of proprietary and fairness.”

More recently in Barkhuizen v Napier 2007 (5) SA 323 (CC), the Constitutional Court developed the public policy test into a two-stage approach in that a contract must not only be objectively reasonable but also subjectively reasonable in the particular circumstances in order to be enforceable. Ngcobo J, in a majority judgment, stated that “… once it is accepted that the clause does not violate public policy and non-compliance with it is established, the claimant is required to show that, in the circumstances of the case there was a good reason why there was a failure to comply.” Ngcobo J went on to say that the Constitution requires parties to honour contractual obligations that were freely and voluntarily taken and that …while it is necessary to recognise the doctrine of pacta servanda sunt, courts should be able to decline the enforcement of…a clause if it would result in unfairness or would be unreasonable…”.

Southern Sun relied on the Barkhuizen case in support of its argument that once it was established that there were circumstances preventing compliance with contractual provisions, insisting on compliance would be unfair and unreasonable. Southern Sun submitted that the prejudice suffered by it would be far greater than the prejudice suffered by Mohamed’s if the cancellation in terms of clause 20 was enforced. The eviction of Southern Sun from the property it had occupied for the past 35 years would not only damage Southern Sun’s reputation in the hospitality industry but it would also lead to the loss of some 91 jobs. Southern Sun therefore submitted that the principle of pacta servanda sunt should be relaxed and clause 20 should not be enforced.

The court was faced with weighing up the principle of pacta servanda sunt with the considerations of public policy in order to determine whether the implementation of clause 20 was manifestly unreasonable or unfair to the extent that it is contrary to public policy. Having regard to the Sasfin and Wells cases, Mathopo JA stated that “The fact that parties enter into an agreement gives effect to their constitutional right of freedom to contract, however, the carrying out of the obligations in terms of that contractual agreement relates to the principle of pacta servanda sunt”.

In considering Southern Sun’s argument, the court had regard to Bredenkamp and Others v Standard Bank of South Africa Ltd 2010 (4) SA 468 (SCA), a case that interpreted Ngcobo J’s reference to public policy importing notions of fairness, justice and reasonableness in the Barkhuizen case to mean that these notions do not extend beyond instances where public policy considerations entrenched in the Constitution or elsewhere would be implicated.

In explaining his understanding of the interpretation applied in the Bredenkamp case, Mathopo J, in the Mohamed’s v Southern case, stated that “…if a contract is prima facie contrary to constitutional values questions of enforcement would not arise. However, enforcement of a prima facie innocent contract may implicate an identified constitutional value. If the value is unjustifiably affected, the term will not be enforced”. The example used to illustrate Mathopo J’s understanding was that of a term in a contract providing for the right of the lessee to sub-lease with the consent of the landlord. The term itself does not offend public policy but, if the landlord withheld his consent to prevent the property being sublet in circumstances amounting to discrimination under the equality clause, the term would not be enforced. Mathopo then turned to consider the facts of the Mohamed’s v Southern Sun case and applied the two-stage public policy test developed in the Barkhuizen case. The following facts were found to be of critical relevance:

  1. The terms of the contract were not, on the face of it, inconsistent with public policy;
  2. The relative position of the parties was one of bargaining equality;
  3. The parties could have negotiated a clause in terms of which Southern Sun was given notice to remedy a breach before the contract was cancelled; and
  4. The timeous performance by Southern Sun was not Southern Sun could have diarised well ahead of time to monitor this important monthly payment and it could have affected other means of payment such as an electronic funds transfer.

The respondent was at all times aware of the implications of the cancellation clause and, therefore, taking the facts into account, the court found that it would not be against public policy to apply the principle of pacta servanda sunt. Mathopo J stated that, “The fact that a term in a contract is unfair or may operate harshly does not by itself lead to the conclusion that it offends the values of the Constitution or is against public policy”. No evidence was lead that any of Southern Sun’s Constitutional rights had been infringed by the enforcement of the cancellation clause and it would have been incorrect, therefore, for the pacta servanda sunt maxim to be relaxed. The cancellation of the lease agreement was upheld and Southern Sun was ordered to vacate the property.

In my opinion the approach followed by the court in Mohamed’s v Southern Sun is correct. A contractual party’s freedom to contract is not only a constitutional right that requires protection by the courts but is also a right that should be respected by the contracting parties themselves. The decision supports the notion that, when entered into freely and voluntarily, contractual obligations must be honoured by the parties.

Manolios is a Senior Associate and Head of the Litigations Department at VDMA.

The hotel group plans to appeal the verdict through the Constitutional Court.

May 2018